It is well known that many countries that have become petro-dependent plunged into widespread corruption, sometimes dictatorship and that the common people did not benefit from the oil wealth. A glaring exception is Norway, which had the foresight to become wealthy and democratic before striking oil. As almost all the world’s untapped oil reserves now lie in the developing world, Norway is  likely to be an exception.

With massive oil discoveries in the pre-salt ( 50 to 100 billion bbl) Brazil is on its way to become petro-dependent. But, Brazil has a strong industry.

In this exclusive interview with Scandinavian Oil-Gas Magazine,  by e-mail, Philip Hiroshi Ueno a Doctoral candidate at the Friedrich-Schiller  University in Economics, one of the leading universities  innovation-related studies in Germany some of the issues related to resource curse and how to avoid it were discussed. Mr. Ueno is also a lecturer in economics at at the Berlin University of Applied Sciences and he studied at the prestigious Fundação Getulio Vargas think tank (FGV) in São Paulo, Brazil.

Scandoil-You know that Brazil's pre-salt is already producing around 300,000 b/d. Petrobras says that in a few years pre-salt will produce 1 million b/d. That is about half of what Petrobras produces from the whole country today.

Mr-Ueno-This projection takes the assumption that the current investment plan will be fulfilled. At the moment there is a huge problem into keeping the investments on track. The recent rise in gas prices will affect positively the investment capacity of the company.

I believe that the potential is true. But this will depend on the how the development activities and the investment plan will go on.

Scandoil-In your opinion Brazil can get to the point of suffering the Dutch disesase? Former Petrobras president José Sergio Gabrielli, who as you know is a prominent economist, spoke about the dangers of Dutch disease in Brazil.

Mr. Ueno-Dutch Disease is a real risk for the Brazilian economy. At the moment there is larger pressure over the exchange rate arising from other commodities such as iron ore and soybeans. Moreover there is excessive liquidity in forex markets, this also poses a risk of increased Dutch disease.

In addition to that, the domestic industry has not kept pace in newer industries such as electronics. The figures on Brazilian exports show that there is a decreasing share of high technology exports. If by one side the exchange rate does not help the exporters of manufactured products, the domestic industry seems to be failing to do the homework in terms of competitiveness and innovation. To give an example, the Brazilian inventors have participated in 3929 patents between 1976 and Feb 2013. China had 31650 patents with inventors residing in China; India 12673; Russia 5484 and South Africa 4512 *.

So, one way to avoid Dutch disease in placing the bets in industries that will have high growth and increasing international demand in the coming years. The private sector in Brazil has also been negligent into targeting high tech industries and innovation.

One should keep in mind that the pre salt reserves are only one potential source of Dutch Disease. The exporting sectors such as iron ore and soybeans can also drive the country into Dutch Disease.  The scenario of international liquidity also puts pressures that may lead to an overvaluation of the Brazilian real.

Scandoil-Can Brazil suffer the resource curse? If yes why, if no why not?

Definitely yes. In spite of improvements in the public sector, the Brazilian institutions are far from solid.  In the Transparency International report concerning  perceptions of corruption, Brazil still stands as the 69^th among 149 nations surveyed. In the global competitiveness index of the World Economic Forum, Brazil stands as the 48^th most competitive country out 142 countries surveyed. One should take into account that Brazil is among the top 10 largest economies. These figures provide evidence that the quality of the government is rather lower if compared to the economic performance in the last years.

There are improvements in the quality of institutions but this been proven rather slow. There is still a huge gap to be filled in terms of fighting corruption and improving the accountability of the government actions.

 Scandoil-Can the fact that Brazil has a strong industry protect it from resource curse and other evils associated with extreme oil dependence?

The Brazilian industry still has some islands of excellence (see, Embraco, Embraer, Natura among others).  For sure the factor helps the country to export. But one should keep in mind that those industries that remain competitive are rather capital intensive. This means that they have lower capacity to generate  employment.

The same industries have suffered a lot from the overvaluation of the Real. The recent interest rate cuts and the Central Bank interventions on the currency markets have softened the situation. But one has to keep in mind that the Dutch disease is exactly the negative effect of commodity export on the other manufacturing industries.

 Scandoil-What are the advantages (if any) of Brazil's upcoming petro-dependence  (Petrobras says that in a few years Brazil will be the fifth largest crude producer in the world) and the disadvantages.

Mr. Ueno-Self sufficiency is positive, no doubts about that. One of the main advantages of it is overcoming balance of payments problem.  Second, with self sufficiency Brazil can shield itself against international price volatility. 

However this view is rather narrow. OECD countries are day by day moving towards the green shift. Brazil has to be seen not as a oil exporter but an energy exporter.

There is a lot of expertise in hydropower generation from the Brazilian companies. There is also a valuable experience with ethanol production. While the investments in the first are taking place, Brazil has lost the self sufficiency in ethanol production. In the last year Petrobras had to import ethanol from the U.S. Moreover, the technological race in this industry is centered on the production of second generation ethanol in industrial scale, a technology that domestic producers are not yet able to dominate.

The biodiesel policy has been a fiasco. And the investments in solar, wind generation and other green sources is always  in the strategic plans of the government but has not yet turned into reality.

So I regret that the vision is restricted to crude oil production when it actually the government and Petrobras should have a broader focus on energy including the ethanol and other sources of green energy.

Scandoil-What is the way out of the resource curse for Brazil?

Improved transparency in the management of Petrobras and also in the use of the royalties of oil. The current discussions benefiting producing states, are in my opinion misguided. They go against the principle that Brazil is a federative state. It is natural under such a system that richer states support the development of laggards.

Resource curse arise not only from weak institutions but to a large extent due to asymmetries of power. In the Brazilian case we are at risk of concentrating more economic powers in the regions that are already developed since most of the pre-salt projects are taking place off the coast of Sao Paulo and Rio.

And as mentioned above. The first key point is the sharing of the royalties. The second point is more transparency and accountability of the expenditures of Petrobras. The third issue refers to keep a private sector that generates job and counterweights the excessive power of the public sector. One of the symptoms of the resource curse is the excessive participation of the government.

 Scandoil- I interviewed former Brazilian President Lula when he was still President  and pointed out that Brazil has had severan economic booms: rubber, coffee, sugar etc. and they all only benefited the elites. Why should the pre-salt boom benefit the common people as the President frequently repeated?

Mr. Ueno-It should benefit common people because the highest shareholder of Petrobras is the Federal Government. Moreover the oil reserves are in the Brazilian territory. The interest of the foreign investors has been respected in the last years.

Scandoil-In your opinion how do you explain that Brazil went from increasing oil output to decreasing, from increasing profits to decreasing profits since Maria das Graças Foster took over as president and CEO of Petrobras in February 2012, substituting Gabrielli?

Mr-Ueno-The main factor is the use of Petrobras to exert control over the price of fuels. The company became a shock absorber of higher international oil prices this clearly reduces the revenues of the company.

Decreasing profits were expected since there is a large investment cycle to be done.

However lower output is rather surprising. The official explanation concerns maintenance of wells.

Scandoil-How do you see the future of Brazil oil and gas sector in the next five years?

Mr Ueno-It is too early to say that the sharing model is wrong. I consider that there are gains to the national industry, there is a revival of the shipbuilding industry. Many suppliers of Petrobras benefit from it as well.

There is enough demand in the domestic market for the oil coming from the new platforms. I  expect an steady increase in the production of crude since the investments initiated in the last government are gradually maturing.

And concerning the gas production, is rather early to know when the new refineries will be active. So there is already a planned increase in the production capacity.

Peter Howard Wertheim is a  veteran oil and gas journalist who covers Brazil and Latin America. He can be reached at: peterhw@frionline.com.br  in Rio de Janeiro, Brazil.